The rural health care enterprise: keeping up with the city slickers.

A cross the country, brutal market forces of managed care are creating uneasiness--if not panic--among insurers, hospitals, and physicians. Employers shopping for health care coverage show no mercy in their search for lower premiunms; the health care industry will find no shelter from these market forces in the foreseable future.

Urban health care systems of the United States were the first to respond to the demands of bargain-shopping consumers. They responded by forming "integrated systems," linking finance to delivery of a broad continuum of health services-often with great haste and catastrophic results as the cultures of the various "partners" failed to achieve a harmonic convergence.

As the managed sare juggernaut rolls into rural America numerous communities appear to be following the strategies adopted by their urban counterpart's. But rural areas are different. There are several key dynamics that must be considered for rural communities to be successful in responding to the considerabie challenges of this market. The PHOs ofthe rural areas may become nothing more than Potemkin villages of integrated health systems dotting the American landscape if important dynamics are not considered, or proper design elements are omitted.

Market Dynamics en Rural Health Care Make no mistake about it: The powerful managed care market forces of the urban areas will come to your rural community. Like the sun, the moon, or a cyclone on the Kansas plains, the natural phenomena of the economic markets will affect your livelihood.

Before plopping down your money to get a copy of the blueprint for health care integration in the city, you should consider the market dynamics in your rural market as part of your "due diligence" work. Blindly accepting the model being implemented in the city may be disastrous if key market dynamics are different:

1. Patients compete for primary eare physicians in rural areas. In economic terms, primary care physicians are a scarce human resource in the supply and demand forces working in rural areas. Unlike the heavily populated urban areas--with a surplus of physicians and hospitals competing for patients--rural communities tend to be underserved by health care professionals. Patients in these communities are often thrilled to be put on a primary care physician's active patient list after waiting months for an opening. This means that threats by managed care companies to move business ("covered lives") from physicians or hospitals who don't accept contract terms will be ineffective. These threats may even gain such managed care companies a well-deserved reputation for managerial stupidity.

2. Consumers will leave the community for discretionary health care services when their opportunity costs are appropriate. Most rural physicians and hospitals are concerned about patrent out-migration from the community. There is a common perceptiQn among rural residents--often incorrect--tlhat "city doctors and hospitals are better." With increasing moibility of rural residents, a trip to a neighboring town or city is a frequent occurrence for many reasons, including access to health care services. This consumer behavior in health care has heen noted=by the courts and the Department of Justice rwently in decisions or opinions regarding relevant geographic markets in such states as Iowa, Wisconsin, Colorado. New Mexico, and California., Competition in mral markets is often with nearby communities, including larger urhan areas that are usually perceived as hotbeds of managed care activity.

3. The population in rural areas is too small to spread reasonable insumuce risk across the community. Many mral communities are developing their own hospital-financed insurance operations to capture (and ksep) , covered lives" in the community's health care system. This is done to either deter managed care companies from entering the community, or. to prepare for provider-sponsored network development in response to public payer initiatives at the state and federal levels. Unbelievably, hospitals and physicians are naively assuming that the insurance risk is manageable, or at least limited (with reinsurance), and are letting eonsultants with little, if any, background in insurance lead them into a dangerous world of high monetary risk. Adverse selection in small risk pools is a vey common phenomenon, and can be disastrous financially. Ingredients for success in tire rural health care enterprise Physicians and hospitals in mra1 areas struggle with the same cultural issues causing decades-old tensiom within the big city delivery system--how to get along with each other. Jeff Goldsmith, PhD (,please see the interview with him on page 5 in this ,issue of Physician Executive) has accurately described this bizarre relationship as an "arranged marriage of the integrated health care system."2 The cultural difficulties arise from conflicts over clinical autonomy, independence, "control," decision-making styles, and governance of community health care systems. The egos of physicians often match those of hospital administrators--even in idyllic, peaceful eommunitres far from the hectic life of the city.

Despite these fascinating and frustrating tensions among the players within the health care system, rural systems can work for everyone--the citizens, the physicians, the hospital, and the insurer. lt nmay not, however, be "integrated" according to conventional wisdom. What is needed to prepare rural health care systems for success in managed care?

1. There must be a onechanism to pro mote improved health within the community, and provision of health-care services within the community when it is sensible to do so. One striking difference between urban and rural communities is the sincere interest in improving the health of the community. Urban health care professionals and administrators usually give lip service to the concept, but are really more concerned about competition from the integrated health care system that is most responsible for eroding their organization's patient base or profit margins.

It is difficult to even define the "community" served by an urban health care system. Is it the neighborhoods surrounding the hospital, or is it the zip code locations of the system's covered lives? Competition between urban health care systems serves to fragment rather than consolidate the sense of community.

Rural communities are smaller, and often have only one hospital. Physicians and administrators know the citizens well, often discussing health care issues with them in the aisles of the Piggly Wiggly, or at the Little League field. There is a sense of pride in the comrrrunity, and hence a genuine desire to improve the health of their neighbors. Furthermore, the community physicians and administrators have a strong and accurate sense of what services are necessary to accomplish the goal of improved health.

The fragile ecology of rural communities is always profoundly affected if the local hospital is struggling to keep its doors open. Health care institutions and profes sior,als in underserved rural areas are a precious resource to the community for both personal and economic reasons. The local hospital is generally one of the three largest employers in any community. If the profits of the hospital suffer, it stresses the community's ability to attract health care professionals and provide employment opportunities for its citizens.

It is critical that patients be cared for locally when high-quality services are available. Furthermore, health care costs are generally lower in underserved rural areas. Though the difiNerence is becoming smaller, utilization is lower, probably due to patient behavior and physician practice patterns and supply.3

2. Physicians must seek expert management resources to run the business of their medical pr=actlce, and should begin to merge practices into an entity that can manage limited financial risk and negotiate more effectively. The market dynamics that areforcing downsizing, mergers, and acquisitions in highly price-sensitive markets around the country will force significant changes in the business of the rural physician, too. The management expertise of large insurers and health care systems overwhelms the traditional physician's expertise. In many rural communities, physicians practice in solo or small group settings. They hire employees with little advanced business or health management skills, and pay them as little as possible. The physician as healer is little interested in the increasingly complicated business side of running a medical practice, yet thinks of him/herself as influential in the business sector nf the community--which s/he most certainly is!

But the frenzied consolidation activities of national and regional health care organizations is creating a mismatch in bargaining power with the fragmented, cottage industry of rural medical practice. It also brings a pool of incredible managerial talent and capital to these ever-larger and powerful health care organizations. Uniess physicians adjust to the realities of the rr.arket by consolidating their practices, hiring expert management talent equal to other segments of the health care industry, and preparing io manage financial risk, they will face dramatically declining incomes, and rtew career choices.

3. Both physicians and hospitals must find sensitive, sensible, and effec=tive leaders to create the environment for success in the rural health care enterprise. Many physicians lhave a natural bias toward physicians as leaders, but being a physician is not the sine pua non of effective leadership. Administrators or physiGians who understand the delicate and dangerous job of working with physiciarss, appreciating the reasons for their behavior, and protecting the need for clinical autonomy--along with understanding the hospital's need for rational planning and efficient operations management--are suitable candidates for leadership positions. These leaders come in all shapes and sizes, but they all share common traits: knowledge of and respect for their constituencies; political skills necessaryto deal with often conflicting goals of their constituencies; Lincolnesque dual attributes nf consistency and flexibility; long-term thinking, with a "generalist" view; optimism and a bias toward renewal of the health care system.

When I worked for Blue Cross and Blue Shield of New Mexico, one hospital administrator representing a rural PHO spent all of a 90-minute meeting with me negotiating DRG rates for the "H" component of the PHO, failing to even address the well-known fee concerns ofthe "P" component. It is difficult to believe that PHOs will succeed when this kind of "leadership" is often the norm, ratherthan the exception.

In contrast, another PHO has strong coleaders in an administrator and a primary care physician, who support each other and share a common vision for improved health and access to health services in their community. When listening to each of them speak, it is often difficult to distinguish which one is the admin strator, and which one the physician. When there is a spirit of collaboration and appreciation of differences among physicians and administrators in a community, efforts to mobilize the health care system can be successful.

Practical suggestions for success in rural health care syslams The market forces reshaping the urban health care scene will be ttre same in the rural setting: the cost reduction imperative. In fact, many of the suggestions ran be applied to the urban health care setting also. These suggestions are designed to interest both financiers of health care services, and the people and institutioos that provide those services. These strategies can he implemented without massive structural redesign, and play to the strengths and weaknesses of each player in the health care game.

1. Get physicians the practice n:anage ment expertise necessary to run an economically efficient business, and to merge their intellectual capital with other physicians in the community. This is the very first step, and must be done before anything else. It is best if a physician leader in the rommunrty embarks on this step independently, with the support of peers, rather than being forced to do so by the local hospital. Physician practice management expertise is a rare talent, but every state has eompanies that offer these services.

Existing medical group practices may be interested in expanding their management resources to other communities. Look for managers with business degrees, and experience in managing physician practiceswith examples of their prior successes in their briefcases. Pay them what they are worth. Goad managers will delegate responsibilities to less expensive personnel, eliminate redundancy in the workforce, and easily manage more than one small practice. This will bring management economies to several small practices.

It is important that physicians decide to organize themselves, because they will have a sense of shared responsibility and success as well as a deep reservoir of Jrust in their management team's abilities and loyalties. The development of this management expertise should be done with the goal of merging practices forthe purpose of accepting financial risk (capitation, package pricing, DRGs) and negotiating with insurers and hospitals.

Begin quickly to build financial incentives in sync with market demands: productivity, utilization management, customer service, and quality--including patient-centered outcomes imprwoment. If the consolidation of practices and physician intellectual capital is done for defensive reasons, it will fail--sometimes with great financial and emotional sacrifice if the Department of Justice is alerted to the obstructive behavior of the organization.

The paradox of the American health care industy is that despite the consolidation activity among insurers, hospital systerr.s, pharmaceutical firms, and medical suppliers to achieve economies of soale, increased bargaining leverage, and arbitrage opportunities, it is the physician who controls 70 to 90 percent of health care cost.s and quality by the orders or prescriptions written on behalf of patients. The clinical knowledge base and professional privilege accorded to physicians makes them the single most powerful segment inthe health care industry.

With proper management, consolidation, negotiating skills, and a commitment to clinical redesign in response to market cost and quality pressures, physician groups will reverse their recent decline in prosperity and influence within the health care industy. The hospital can play a key role in helping physicians identify superior practrce management expertise.

Insurers prefer to do business with a well-managed physician group that understands the demands of the market, and uses a proactive approach in meeting these demandsincluding civil business behavior when dealing with employer groups and insurers.

2. (Once the physicians are organized, set up aligned incentives with the hospital to manage the cests and quality of medical care that fit with the payment methodology commonly used in your market--with an eye to developing capitation systems in the very near future (if not now).

Physicians are the hospital's greatest ally in reducing the costs of care and keeping patients in the community. Like the local hospital, physicians do not want to use patients to nearby communities, so they will be supportive of hospital efforts to be more efficient and attractive to patients.

Include physicians in key leadership roles in the hospital to help redesign clinical processes of care, and jointly develop programs that address unmet preventive health needs in the community. The physicians and hospital have much common ground in their goals for the community; if incentives are aligned, it is much easier to work together.

For heaven's sake, do not promote hospital purchase of physician practices. You do not have any more control over what physicians order whether they are independent or employees. And employment sets up many additional responsibilities for the hospital. What is being bought? If "control" is desired, know tlhat it doesn't work with physicians, just as it doesn't work with cats.

Examples abound from across the country of physician productivity dropping after they become employees and adopt a "civil service" approach to their work. Management of ph.ysician employees can be very difficult--including management of medical directors. It is mueh better to work collaboratively with dedicated, independent, entrepreneurial-minded physicians than to make them conform to a hospital (or insurance) control mentality.

3. Do not develop your own community health insurance company. Instead, approach managed care companies that might be interested in=doing business in your area (they all will be interested) about developing a financial relationship to manage insurance risk, and provide partial capitalization of health improvement projects in the community.

This recommendation may sound strange, but the market dynamics examined earlier make it realistic: Insurers must bring value to the rural health care community because of the supply, demand, and scarcity issues discussed above. That value can be in reduced red tape, or assistance in meeting the needs of the community. Without bring ing value to already overburdened rural physicians and hospitals, why would anyone want to sign a contract with them

Insurers know financial and actuarial risk, as well as claims processing and marketing. They may be a source of capital for expanded access to health services in your community as market needs demand. It will be in the best interests of an insurer partner to help respond to customer needs in your community.

And they will want to keep patients in your community whenever possible, unless the insurer is owned by a larger hospital system. In that Gase, the insurer will actively promote migration of patients to the larger hospital system to protect its market share at the price of yours. Save your money for making the community health system stronger. Let others with much more capital weather the ups and downs of financing health care.

Consider developing a local brand name managed care plan in collaboration with a financially sound insurer. Most insurers have shelf product.s with the insurer's brand name on it, but use different labels io differentiate co-pay amounts, benefits, and additional coverage.

Insurers should welcome an opportunity to expand into new rural markets with the support of the local health care community--but they will have to recognize the local identity that the community desires. For example, the plan can be the "Pleasantville Health Plan," but the member's health plan card can also include the logo of the well-known health insurance company that processes the claims and markets the plan.

4. Invest in information systems that track utilization and financial risk pools. Prepare for provider-sponsored networks for both private and public payers. Use your contractual and trust relationships with key insurers in your community to bring needed financial and actuarial expertise to administration of these contracts.

Congress is moving in the direction of allowing provider-sponsored networks to compete with established insurance companies for large blocks of both public and private business. It may reduce administrative costs and thereby benefit consumers with lower prices.

However, even provider-sponsored networks will require actuarial and insurance risk expertise to accurately administer these contracts. Furthermore, not all services required for citizens of your region can be provided in the community hospital. By working with insurers that have statewide contacts for tertiary and quaternary care, your enrollees can have access to established health care networks--often at competitive rates.

Health care in a rural setting comes with challenges often unimaginable in the city. The personality and life-style of the rural physician or hospitil administrator may be different from those of their colleagues in the city. Like politics, health care is local. Solutions to rural health care in an era of enormous cost pressure must be tailored to each community. Before traveling the route of health care systems in the city, determine whether the urban strategy will work in your community.

References

[1.] Burda, D. "Does Get Their Way." Modern Healthcare. January 8, 1996. pages 40-45. [2.] Goldsmith, J. "Driving the Nitroglycerine Truck". Healthcare Forum Journal. May/June 1993, pages 36-44. [3.] Underwriting Department, Rocky Mountain Healthcare Corporation, Denver, Colorado, personal communication.